30 December 2006

Soviet and American adaptation to Peak Oil

Hubbert Peak Oil (HPO) theory has it that the industrial world is facing a permanent and irreversible decline in supplies of oil. Specifically, the daily rate at which petroleum will be recovered in the future must necessarily decline. World oil consumption is gradually increasing; in the last ten years it's grown 1.6% annually. US oil consumption has been growing somewhat more slowly, but still accounts for about a quarter of the world total. Moreover, while US oil consumption growth is slower than the 3rd world, it is higher than the rest of the first. The world now consumes about 84 million barrels per day.

POT is unrelated to the threat of global climate change ("Global Warming"). RNL&A prefers the term "Climate Change" because the phenomenon is much more complex that that of a mere increase in the ambient temperature. My own views are that a peaking and sharp decline in world oil supply would probably have a catastrophic effect on the world economy, but would not suffice to seriously mitigate global climate change. That's because the consumption of coal is over 6 billion tons per year and rising. Coal consumption rises in response to rising energy prices, and most of that increase is in Asia. After almost 20 years of steep decline, coal is recovering as an industry in the former USSR, while China's output has shot up to a third the world total.

One of the aspects of the Soviet economy, and by extension, its system of social organization, was alleged to be its profound inefficiency. After the collapse of the USSR, there was an abundance of literature explaining why the Soviet system was fated to collapse. It was regarded as the ultimate ideological validation for the managerial cadres running the US economy. The prolonged misery that gripped post-Communist Russia revealed an immense dysfunction in the industrial system. It was hugely wasteful in execution, with machines vastly larger and more elderly than made any technical sense. The Soviet system also left a massive amount of pollution, much of it spawned by an utterly unaccountable military.

However, the case has been made that the Soviet system left intact a system of consumption and material culture that was more adaptible than the US economic system. This claim was made by Dmitry Orlov recently in a presentation made for the Energy Bulletin.

The subject of economic collapse is generally a sad one. But I am an optimistic, cheerful sort of person, and I believe that, with a bit of preparation, such events can be taken in stride. As you can probably surmise, I am actually rather keen on observing economic collapses. Perhaps when I am really old, all collapses will start looking the same to me, but I am not at that point yet.

And this next one certainly has me intrigued. From what I've seen and read, it seems that there is a fair chance that the U.S. economy will collapse sometime within the foreseeable future. It also would seem that we won't be particularly well-prepared for it. As things stand, the U.S. economy is poised to perform something like a disappearing act.

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Continuing with our list of superpower similarities, many of the problems that sunk the Soviet Union are now endangering the United States as well. Such as a huge, well-equipped, very expensive military, with no clear mission, bogged down in fighting Muslim insurgents. Such as energy shortfalls linked to peaking oil production. Such as a persistently unfavorable trade balance, resulting in runaway foreign debt. Add to that a delusional self-image, an inflexible ideology, and an unresponsive political system

Orlov's article is especially interesting to me for many reasons. One is that I have a deep and abiding fascination with the USSR. I share his view that there are many strong parallels between Soviet and American society, parallels that distinguish those countries from the rest of the world. Another is that the Cold War ended when I was 23. During my formative years, I suffered from something of an obsessive dread of Communist world domination, which possibly turned me into a delusional paranoiac (If so—how would I know?). When the USSR economy collapsed, my initial relief and sense of validation was soon replaced with sadness, then horror and shame. Horror, because the reality of Russian misery was something I had never imagined. Shame, because I had once looked forward to precisely this—collapse of the military threat, as well as utter discredit of the Leninist ideology. The end of the Cold War with a mostly-peaceful institutional implosion, had seemed like the best of all possible worlds. But I had not expected that the social problems of Russia would continue to worsen as Washington pressed its advantage.

The third reason was that I began to see signs that the US economy was far from immune. The safeguards I had taken for granted—chiefly, constant adjustment to technological earthquakes—were not necessarily having the beneficial effects I had assumed they were. The liquidity of our financial markets was not constraining fiscally irresponsible governance in the USA; moreover, my assumption had once been that improving technology was reducing the volume of non-renewable resources per unit of consumption. In other words, the same or better standard of living could be furnished with diminishing inputs of fossil fuels, metals, or environmental sequestration. The opposite is true.

Orlov's article "Closing" is best augmented by reading "Soviet Lessons," which is essentially the same information in more detailed prose exposition. I found this passage captured the gist of the article (i.e., from the point of view of an economist):

It can be said that the U.S. economy is run either very well or very badly. On the plus side, companies are lean, and downsized as needed to keep them profitable, or at least in business. There are bankruptcy laws that weed out the unfit and competition to keep productivity going up. Businesses use just in time delivery to cut down on inventory and make heavy use of information technology to work out the logistics of operating in a global economy.

On the minus side, the U.S. economy runs ever larger structural deficits. It fails to provide the majority of the population with the sort of economic security that people in other developed nations take for granted. It spends more on medicine and education than many other countries, and gets less for it. Instead of a single government-owned airline it has several permanently bankrupt government-supported ones. It spends heavily on law enforcement, and has a high crime rate. It continues to export high-wage manufacturing jobs and replace them with low-wage service jobs. As I mentioned before, it is, technically, bankrupt.

It can also be said that the Soviet economy was run either very well or very badly. On the plus side, that system, for all its many failings, managed to eradicate the more extreme forms of poverty, malnutrition, many diseases, and illiteracy. It provided economic security of an extreme sort: everyone knew exactly how much they would earn, and the prices of everyday objects remained fixed. Housing, health care, education, and pensions were all guaranteed. Quality varied; education was generally excellent, housing much less so, and Soviet medicine was often called "the freest medicine in the world".

On the minus side, the centrally planned behemoth was extremely inefficient, with vast lossage and outright waste at every level. The distribution system was so inflexible that enterprises hoarded inventory. It excelled at producing capital goods, but when it came to manufacturing consumer goods, which require much more flexibility than a centrally planned system can provide, it failed. It also failed miserably at producing food, and was forced to resort to importing many basic foodstuffs. It operated a huge military and political empire, but, paradoxically, failed to derive any economic benefit from it, running the entire enterprise at a net loss.

Orlov is very tactful and gentle in his mode of expression, especially considering the melancholy message he has to convey. In short, this is that the US economy has produced a population totally incapable of coping with system failure, and a system likely to fail much more comprehensively than the Soviet one did. Sure, the USSR was no longer able to maintain a colossal state apparatus, and the sudden reduction in state services or subsidized industry was traumatic; but the pieces of the industrial system had developed adaptive methods. There was no chance of evicting the majority of the population from their homes; in the United States, it seems quite likely this could happen in the event of oil supplies peaking. In the USSR, central planners designed communities to survive and function even in the event of comprehensive industrial failure; this meant compact towns that could be easily crossed on foot, and huge common areas which could be adapted to "victory gardens." Mostly this was because central planners were trying to make it easy on the Soviet economy: cities were designed to be cheap to supply and maintain, and that mean mass transit, short roads, short mains, and traditional construction techniques.

An additional problem is that the US economic system produces an immense deficit of skills. Another is the reliance on segregation to maintain civil order—by class, race, or criminality. Corrections systems are responsible for controlling over 1% of the population, but security systems and security procedures tend to creat much larger populations of quasi-criminals: Americans not accused of a crime, but essentially roped off and assumed to be dangerous. Another is that much of the US infrastructure or commonly-used technologies, such as appliances, are virtually disposable. One does not repair an appliance anymore; one replaces it. And most of the initiatives to rectify the situation are much worse than useless. Biofuels, for example, have been a disastrous confusion sown by the new concern about "imported" oil or climate change.

Mr. Orlov is skeptical than anything useful will be done at the national level. The USA is not going to mitigate its addiction to oil. It is not going to make its cities more user-friendly or more efficient. It is not going to overcome its addiction to manufactured crises or "wars" on problems. Instead, the system will run until it collapses because political systems do not sidestep calamities. Therefore, Orlov advises complete disregard of national politics. The political system is utterly useless, and doesn't even merit mockery. His discussion of the private sector is a masterpiece of tact—he merely explains that he believes private sector solutions are highly improbable. That leaves one's own initiative. This consists of reducing one's physical needs and dependence on the integral economy. I would expect many to read his article and contemplate immigrating to Patagonia.

As with any gloomy scenario, it's made more palatable by humor. Orlov is an excellent writer and his methods of self-expression are superb. But how accurate is it?

Well....

Bear in mind Orlov's premise is not merely that US society is unprepared for the collapse, whereas Soviet society was rather more prepared. According to Orlov, Russia was able to recover (somewhat), partly because of its vast reserves of energy and the fact that it actually used less than the USA. Canadian society, for all its many superior virtues, is just as vulnerable to collapse of the same sort. Mexico, sadly, has been rendered acutely vulnerable thanks to NAFTA, although it is still head and shoulders above its northern neighbors. Still, it seems likely that the lack of a vibrant overland neighbor like the EU or China would render the US unlikely to recover at all, ever.

The other premise is that there is no favorable role for political activity.

Both premises seem a little extreme. One is the idea that peak oil is like a cliff. Orlov supposes that the entire industrial system would effectively collapse within a year at most. In the USSR, the process of collapse actually took place over 8 years, 1985-1993. One way this might happen is if the US dollar were to unilaterally lose much of its value. While I've researched this as a possible response to the terrifying indebtedness, it must be said that currencies don't behave this way. A financial collapse would be important to the narrative because it would explain how the economy suddenly lost access to much more than 60% of the crude oil it imports—within, say, six months. But economies like those of Japan and China would have to avoid collapse too, something unlikely to occur since they are so dependent on exports to the North American economy.

The other is that the political system would remain useless. There is much to be said for this view, since politics does not favor highly sophisticated response to technically complex problems. However, democratic institutions have a resiliency that is lacking in authoritarian ones. A more plausible scenario is the onset of the Great Depression, which began with a loss of over 40% of production in two years. The Depression was much more dreadful than is now imagined; a gigantic proportion of the population was reduced to destitution and homelessness. There was an entrenched ideology of virtuous prosperity and vicious failure. Yet the point was never reached where civil life disintegrated. It was a cruel time, but the US or harder-hit Canada did not regress to the Middle Ages.

Second, unlike the collapse of the USSR, the collapse of the USA would actually be more global. Some countries, like Japan, would endure relatively well, since they have reduced the significance of petroleum in their economy (the ratio of GDP to energy consumption in Japan is among the lowest in the world). But the disruption would be more diffused in space and time than Orlov suggests.